Auto enrolment: should saving for a pension be compulsory?
Nearly 70% of employers think that staff should be obliged to save for their retirement. Opt-outs would be forbidden.
In three months’ time, the Government’s new auto-enrolment scheme will start.
Under this scheme, many people will find that pension contributions are automatically deducted from their salaries. That’s unless they decide to opt out of the scheme.
Larger employers will start enrolling staff this October and all smaller employers will be operating the scheme by April 2017 at the latest. Read more in Auto enrolment: your salary will fall by £300 a year from October.
I think auto enrolment is a good idea. We’re living longer and the Government is getting poorer; so it makes sense that people should be pushed to save more for their old age.
There’s one problem, however. Some people won’t save – they’ll opt out. The 'best guess' estimate is that the opt-out rate will be something like 25%. In other words, around a quarter of employed workers will say that they don’t want to join their employer’s pension scheme. And on top of that, self-employed workers won’t be enrolled at all.
Admittedly, some ‘opt-outers’ may be making other provision for their retirement. Perhaps they’ll be saving via ISAs or investing in buy-to-let flats.
But still, I’m in no doubt that a big chunk of the working age population won’t be saving for old age at all.
So I was interested to see a report that 70% of employers think staff shouldn’t be allowed to opt out of auto-enrolment schemes. The report is based on a survey by the Chartered Institute of Payroll Professionals.
And employers aren’t alone. The OECD, the global economics organisation, thinks there’s a strong case for compulsion.
So let’s look at the arguments for and against a ban on opting out.
For a ban
- If people don’t save for their retirement, they’re potentially hurting other UK citizens. That’s because the rest of the country will have to pay more tax to support an elderly person with no pension savings. Anyone who doesn’t save for their retirement is arguably a freeloader.
- Forcing workers to save when they’re relatively young – in their 20s and 30s – means those people will be able to benefit from the miracle of compound interest. In other words, if you put money aside for your old age when you’re 30, your cash has a long time to grow into something more substantial.
- Forcing people to save at a young age encourages them to start thinking about money early on.
- Some people will never save for their old age unless you introduce compulsion.
Against a ban
- The UK is supposed to be a free country. A ban on opting out would be a major curb on that freedom.
- Some people argue that pensions aren’t the best way to save for retirement. Yes, pensions benefit from tax relief, but they often come with high charges, perform poorly and have delivered disappointing incomes for recent retirees. (That’s because annuity rates have tumbled in the last few years.) Shouldn't employees be allowed to choose their savings vehicle and save for their retirement in whatever way they think best?
- You're not just forcing people to save. You're forcing them to lock their money away for up to 40 years. They may not live long enough to benefit from their savings.
- People in their 20s and 30s need to pay off their student debts and save for a deposit. Surely they should be allowed to do that as quickly as possible?
- Folk with expensive debt at high interest rates should be able to focus on paying down that debt.
Personally, I think the arguments for a ban on opting out are strong, but I wouldn’t support a ban just yet. I’m always nervous about restricting the freedom of individuals, and I worry that a significant portion of the population would be driven to unhealthy levels of rage if they were forced to put their money in a savings vehicle that has a mixed track record.
Sadly, many Brits are already deeply cynical about our political system. I wouldn't want to make that situation worse.
So right now, I think it’s best to focus on ensuring that as few people as possible opt out of auto-enrolment. Obviously people like me in the media have a role to play in that process, as do employers. If employees are well-informed about what auto-enrolment involves, I think they’re more likely to stay in the scheme and contribute to their pension.
I also think the Government could offer some extra incentives to increase participation.
So maybe under-30s could receive a £50 cheque at the end of every year they contribute to a pension. Or perhaps a small portion of their student debt could be written off if they don’t opt out.
A lottery for all pension savers would be another option – this could be offered to savers of all ages.
But if the opt-out rates prove to be higher than 25%, the Government may have to think again and see if they dare to introduce compulsion.
What do you think about this issue? Let us know in the comments box at the bottom of this article.
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